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Edited Transcript of RBS.L earnings conference call or presentation 2-Aug-19 12:00pm GMT

Half Year 2019 Royal Bank of Scotland Group PLC Earnings Call (Fixed Income Investors)

Edinburgh Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Royal Bank of Scotland Group PLC earnings conference call or presentation Friday, August 2, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Katie Murray

The Royal Bank of Scotland Group plc - CFO & Executive Director

* Robert Begbie

The Royal Bank of Scotland Group plc - Treasurer

* Rupert Mingay

The Royal Bank of Scotland Group plc - NatWest Markets Treasurer

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Conference Call Participants

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* Corinne Beverley Cunningham

Autonomous Research LLP - Partner, Banks and Insurance Credit Research

* Lee Street

Citigroup Inc, Research Division - Head of IG CSS

* Robert Louis Smalley

UBS Investment Bank, Research Division - MD, Head of Credit Desk Analyst Group, and Strategist

* Tom Ian Jenkins

Jefferies LLC, Research Division - SVP and International Credit Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. This afternoon's conference call will be hosted by Katie Murray, Chief Financial Officer; and Robert Begbie, Treasurer. Please go ahead.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [2]

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Thanks, Steve, and thank you for joining the call. On the line, you have myself, Katie Murray, Group CFO of RBS. I am joined by Robert Begbie, our Treasurer; and also by Rupert Mingay, our NatWest Markets Treasurer; and Paul Pybus, our Head of Debt Investor Relations.

We've put some fixed income slides onto our IR website, which Rob and I will now talk you through. I'll provide a quick review of our results that were out earlier today, and then Robert will provide a treasury review of the half year. And then we'll naturally open up for Q&A.

As you've seen from this morning's announcement, we are a bank that is growing well. We have a strong and stable balance sheet position; however, a following -- a falling yield curve and a deterioration in business investment appetite and intense competition in the mortgage market are headwinds for our business. Given these factors, achieving a 12% ROTE by the end of 2020 is very unlikely, although we continue to believe that 12% is achievable in the medium term.

With this, let me take you through some of the detail of our financials. Let me start by talking you through the P&L. Our total income was 6% higher than H1 2018. This was very much as a result of the disposal of Alawwal holdings, which added some GBP 990 million to income. So if we take this out, our income was lower than 2018. There were 3 main reasons for this: ongoing margin pressure in personal banking business; GBP 192 million of fair value and disposal gains in commercial in the prior year; and in line with what we see in the market, lower client activity in NatWest Markets, which saw their income in their core business down GBP 26 million or 4% in the half, though it was up Q2-on-Q2 by GBP 9 million or 3%.

Moving on to margins. Our bank NIM was down 5 basis points in the quarter, mainly due to continued mortgage income pressures as well as tighter deposit margins as the yield curve flattens and the structural hedge income reduced. This particularly impacted U.K. personal banking. In recent quarters, the competitive pressure on asset margins, notably mortgages, was partially offset by deposit margin benefit following the rate rise in August '18. However, in Q2, we saw the yield curve fall very sharply, putting pressure on our deposit funding benefits as well as our structural hedge.

Continuing down the P&L. We reduced our costs by GBP 173 million in H1 '19. There were GBP 629 million of strategic costs in H1 and GBP 60 million of conduct and litigation. This combined to create our all-in cost income ratio of 57% for the half year.

Our impairments were 21 basis points in H1, which includes a number of charges for single names within the commercial business in the quarter. We still do not see any material changes in the underlying performance of our loans and advances book, but we do see some signs of strain. Putting these together, we produced an operating profit before tax of GBP 2.7 billion in H1, up 48% on 2018. H1 attributable profit was GBP 2 billion, with a return on tangible equity of 12% for the period or 16% for quarter 2.

Turning briefly to loan growth. In the first half of 2019, we've grown at an annualized rate of 2.5% across Personal & Ulster and Commercial & Private Banking, which is considerably better than we achieved in Q1, with our annualized growth rate of 0.8%. Our target for 2019 is 2% to 3%, and we are firmly on track. We have, of course, maintained our prudent risk approach and pricing in a very competitive market across all of our businesses. We are very comfortable that this growth is earning above our cost of equity as we continue to grow our balance sheet.

Turning to capital generation and returns. I know that fixed income investors like a strong capital number so I'm pleased, of course, to share with you, we ended the quarter with a CET1 ratio of 17.1% before any dividend accrual. Our underlying capital generation, if we exclude Alawwal, was 15 basis points versus 30 basis points in Q1, down as a result of increased impairments and strategic costs. In line with our 40% dividend payout ratio approach, we have reflected 20 basis points against our CET1. And from this, we have declared an interim ordinary dividend of 2p per share. In addition, we've also declared a special dividend of 12p or 80 basis points. This is in line with our aim to reduce our capital levels from the 16% CET1 ratio that we ended last year on our journey to 14% by 2021.

We continue to maintain the capacity to do a directed buyback from the government at any stage they deem appropriate.

Looking at RWAs. They were down GBP 2 billion in Q2 2019 at GBP 188.5 billion, with the Alawwal Bank merger benefits partially offset by increases in core NatWest Markets and U.K. PB lending. We retain our full year 2019 RWA guidance of around GBP 185 billion to GBP 190 billion. It's quite clear that we have built a strong capital position through organic capital build and optimizing our capital usage.

And so to summarize, we've continued to deliver strong loan growth of 2.5% annualized, or GBP 3.6 billion in the first half, and we have done that in challenging times. Costs are absolutely within our control, and we remain committed to taking out GBP 300 million this year, having taken out GBP 173 million to date. On capital, we're in a very good place to generate and distribute sustainable returns, as we have announced today. We continue to believe that 12% remains on the right target for the group and is achievable in the medium term. And I am confident that we are delivering on the levers today to take this business forward.

And with that, let me hand over to Robert. Thank you.

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Robert Begbie, The Royal Bank of Scotland Group plc - Treasurer [3]

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Thanks, Katie. Good afternoon, all, and thank you for joining today's call. While the deteriorating global economic outlook, low interest rate environment and continued political uncertainty are impacting the sector, we have a robust balance sheet, which is well positioned for this environment given our strong capital, funding and liquidity levels. As you've heard from Katie, we have a very strong CET1 position with capital accretive earnings, supporting those term of capital to our shareholders.

You will also recall that we achieved a clear path in last year's Bank of England stress test as we have divested ourselves of the legacy assets and settled major litigation, further supporting our capital strength. And we continue to manage a level of liquidity we consider appropriate in this environment. Although surplus liquidity does somewhat impact our net interest margin, at that level, we are comfortable with in the face of current market uncertainties. And as I think about liquidity strategy, I'm also mindful of changes to the banking environment. Open banking, digital technology, challenger banks, the closure of TFS creates sector-wide refinancing requirements in the future, and we intend to ensure we have a strong, sustainable funding and liquidity in response to those challenges.

On issuance, we've made good progress with our 2019 plans, leaving us well positioned for the remainder of the year and for any change in market conditions in the second half. On ratings, last year's positive action by all 3 credit agencies continued into 2019, with S&P's one notch upgrade across all entities in May with outlook stable. And finally, we continued to optimize our legacy liability stack with a further EUR 1 billion of Tier 2 securities called in March.

Turning to the next slide and an overview of the balance sheet. We end the half year with a solid set of key balance sheet metrics. Now funding reflects a diverse mix of retail, commercial and wholesale liabilities. On capital, our CET1 ratio at the half year was 16% post capital distributions, and our total capital ratio was 20.9%. The total loss-absorbing capacity ratio, including senior MREL of 32.1%, comfortably above our minimum regulatory requirements. Our loan-to-deposit ratio remains a healthy 86%, with our customer lending supported by solid core deposit base. And we've seen deposit growth across our retail and commercial businesses in the ring-fence during the first half.

Our LCR for the H1 was stable at 154%, with a total liquidity pool of GBP 203 billion. This is an increase of around GBP 5 billion in the first half as deposit growth and the proceeds of net issuance were partially offset by the Tier 2 redemption, payment of the 2018 dividend and a further GBP 4 billion repayment of TFS during May. This TFS repayment takes our outstanding drawings to GBP 10 billion at the end of June from a peak of GBP 19 billion, a significant repayment well ahead of required maturities.

And turning to the next slide. For the full year I guided, we plan to issue GBP 3 billion to GBP 5 billion of senior holdco, and I'm pleased that we have already met the lower end of that range, executing 3 successful transactions during the first half totaling around GBP 3 billion. I'd like to thank those investors who participated in our deals this year. Looking ahead, and taking into account both MREL requirements and liquidity considerations, our year-to-date progress leaves us well placed to adapt our H2 issuance to prevailing market conditions.

Our total stock of MREL-eligible securities issued since 2016 is now GBP 19.2 billion. As I've said before, we will look to continue to build out the maturity profile of our funding, and I'm pleased that our 3 holdco transactions this year varied in duration from 6 non-call 5 to 11 non-call 10.

On currency, although the U.S. dollar is still the deepest market for our holdco MREL requirements, it was pleasing to see NatWest Markets active in the senior opco yen market in the first half, and we will continue to look for opportunities in that market and other markets going forward.

We also successfully competed -- completed our first SONIA-linked covered bond from NatWest Bank, raising GBP 750 million and a further capacity to issue more in the secured market, depending on our liquidity and funding needs within the ring-fenced bank. As I said at the beginning of the year, given our balance sheet structure and capital requirements outlook, we do not foresee the need for additional Tier 1 in 2019. However, there is potential for Tier 2 refinancing in the second half.

NatWest Markets also made good progress against their plan to issue GBP 3 billion to GBP 5 billion of senior unsecured with a total of GBP 3.5 billion executed during the first half, including the first U.S. dollar issuance from the newly established [140 48] program. And finally, I note the Bank of England's finalization of the resolvability framework this week and confirm that we see no impact on our MREL issuance plans or in our wider activities to meet Bank of England's expectations.

To conclude, we're navigating a period of uncertainty with a very strong balance sheet, generating strong underlying capital growth, maintaining a healthy LDR and strong liquidity metrics. We've made good progress with our 2019 funding plans across all issuing entities. We're diversifying our funding, and we've taken action to further optimize our capital stack.

And with that, I'll hand back to the operator to open up the call for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we have today comes from the line of Robert Smalley.

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Robert Louis Smalley, UBS Investment Bank, Research Division - MD, Head of Credit Desk Analyst Group, and Strategist [2]

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Thanks for doing the call in the U.S. hours, greatly appreciated, Paul, Robert and Katie. A couple of questions really around Brexit. Could you talk about what your central scenario is for Brexit going forward? It appears that from what you've said in the past and today that a hard and somewhat disorderly Brexit is certainly what you're preparing for. And as this would potentially impact SMEs first and hardest, could you give us a couple of indicators that you're looking at, maybe even away from some of the macro data to try and track that and get an early jump on that, if that should occur? That was my first question. Second question, on the liquidity portfolio, that continues to be built up. How much of that is U.K.-related? How much of that is deployable if the hard and disorderly Brexit should come about?

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Robert Begbie, The Royal Bank of Scotland Group plc - Treasurer [3]

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Okay. Thanks for the usual, great questions. Let me kick off and Katie may jump on the Brexit question as well, and then I'll answer the liquidity portfolio one. I mean, I think in terms of the central scenario, you've got to look at it, I think, in 2 ways. One is the economic and interest rate environment, and two is our operational readiness. Maybe start with the operational readiness and then I'll come back to the economic and interest rate scenario. I mean we had planned for and prepared for effectively a no-deal Brexit as at the end of March. So I think as was touched on this morning on the analyst call, we are operationally ready for the no-deal Brexit. We have N.V. and Frankfurt operational as our offices to take care of that and a number of other things have gone on internally to make sure that we understand, not only from a geographical point of view, but from just an operating model point of view, how the bank would operate in that type of kind of scenario.

So operationally, whilst you've always got to make sure that you keep looking to see and make sure you haven't missed anything. And clearly, if we end up with a no-deal on the 1st of October, we would stand up our usual framework for dealing with those types of instances. But we feel like we're as prepared as we can be for that.

I think on the economic and interest rate front, I mean, look, it's an evolving picture. I mean, I think -- if you listened to Mark Carney yesterday, and it might be this or it might be this. And there is obviously a certain amount of uncertainty around what we're going to see both in terms of economic activity and interest rate outlooks. We do expect the consensus. Consensus, certainly from an interest rate perspective, it has been moving around in the last 2, 3 months. But we don't try and second guess where we think the market is going to go on this stuff and plan for that.

I'll maybe just hand over to Katie, just maybe on the SME, and I guess your question really relates to any sort of impairment-type stuff, and then I'll pick up the liquidity portfolio.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [4]

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No, thanks. Thanks, Robert. When we look at SMEs, at the moment, the reality is that the group is actually growing within sort of SME and mid corp kind of sector so people are certainly still borrowing. But in terms of what we look at, it's very much a lot of it is the feedback that we get from the relationship managers, who are out talking to those smaller business and actually what is the mood on the ground. And other things, I think they are very helpful to us on things like some of the CBI service, where they're actually out talking to far more of SMEs than we cannot necessarily get to, to get those kind of feedback. But this morning, we talked about the PMI Index and what we do see is that it is falling both on manufacturing and a service basis. That's fallen off to or below 50 in the last couple of months, and that's really a big measure for us of the investor confidence. So it's interesting. At the moment, at the smaller end, we see lending, we see activity going on, we know we're at really low levels of unemployment in the U.K., and that really helps that kind of SME sector. So it's to actually try to get where the ceiling is for the [music].

When we look at the macro, the realities in terms of growth, our assumption last year was at 1.6%. So only really moved to 1.5%. So if you can imagine that if it stays at that kind of level, I often think that the rhetoric is actually worth the numbers are suggesting on the ground. So it's hard, but you say, I think you just have to pull input from lots of different places. But I think the most important thing is talking to your customers and then sticking to your risk and lending principles as you work your way through to see and to make sure that you're in touch with them.

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Robert Begbie, The Royal Bank of Scotland Group plc - Treasurer [5]

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And on the liquidity portfolio, I mean, I might answer a couple of ways. I think the start point we run in any liquidity portfolio is to match the liquidity asset shareholding versus the outflow assumptions you are making, both in terms of products and currency. So as we've become a more sterling-based bank over the past number of years, then our liquidity portfolio really reflects that. Now, that's not to say, we just hold U.K. Gilt, because we don't, but -- and then in NatWest markets, they will hold more of a multi-currency approach because they are more multi-currency business than the ring-fenced bank is, so really matching that off. And that's on the primary side.

If you think about secondary liquidity and things like the discount window facility, the assets that we have pledged at the Bank of England are pretty much mostly U.K. mortgage-based assets, so the sterling-based assets that would be prepositioned there. I think the other interesting point to this was that the Bank of England announced the -- what's called the best scenario. And they've put the scenario itself this time for the banks on a market-wide U.K. liquidity stress, which I think -- and it's designed really for 2 things. One, clearly, to test at an overall level, the bank's resilience to a liquidity-type scenario for U.K. banks. But I think also to inform the Bank of England and the PRA about what tools they have in their armory and are they sufficient to respond to a U.K. bank type liquidity stress scenario.

So I think there's lots of good work going on just to make sure that if there is any sort of disruptive Brexit or disruption in the marketplace, the U.K. banks are able to cope with that. And we're not the only U.K. bank that's running a significant surplus liquidity position. And I think if you took all that out, there's a very big cushion out there in terms of U.K. banks and the liquidity positions right now.

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Operator [6]

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The next question today comes from the line of Corinne Cunningham from Autonomous.

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Corinne Beverley Cunningham, Autonomous Research LLP - Partner, Banks and Insurance Credit Research [7]

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One very quick one. Sorry, I wasn't able to dial in to the call this morning, so you may have already said it, but what are the implications from losing the GSIB status? So what would be your DSIB buffer if you apply it across the group? And are there any other implications for losing the GSIB status? And then just an update on plans for Ulster Bank. When I look divisionally, that does still seem to be such a long way behind the other divisions. So I'm just wondering what the plans are there.

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Robert Begbie, The Royal Bank of Scotland Group plc - Treasurer [8]

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Corinne, I'll pick up the first one and then Katie -- Katie answered that -- Corinne, answered the second question this morning so I'll let Katie cover that one. Yes. I mean, the DSIB buffer was, as expected for us, we expected DSIB to come in. There is a -- until we lose the GSIB status, which is at the 1st of January next year, then effectively, there's a net set-off between what we have to hold as a DSIB versus the GSIB buffer. So net-net, it was in the plan so there was no additional capital requirements that came out of that. The only benefit from losing the GSIB, apart from some operational reporting, at the things that we don't need to do now, as an MDA at group level. So obviously, the DSIB doesn't apply at the group level. So effectively, MDA will drop by 1% as at the 1st of January next year.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [9]

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Thanks, Robert. And if you look also, look at it behind, I think we've always been quite open about that. I think that the -- we've obviously -- I mean, it's a few years behind where the rest of the bank is. But as we recapped it, what they do do there, they're making good progress, they're 2% ROE this year. What I would expect to see is over the next number of years, is that would just steadily build. This year is very much around get the remaining conduct and control kind of issues behind you. They're well very much on track to do that. We're hopeful to get a bit of dividend out of them at the end of this year, which I think would be very much appreciated as it will help to normalize our capital base a little bit. I mean, there's still more to go on that. And I see over the next 2 to 3 years, we should just see it continuing to move forward.

What is nice is that we're making progress on the NPLs. The old tracker book is curing quite a bit as we go through -- and the, I think, GBP 400 million that cured in the first half of the year. And we're seeing some nice growth in new businesses coming on. So the underlying is kind of heading the right way, but they still have some of their legacy issues they need to deal with.

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Corinne Beverley Cunningham, Autonomous Research LLP - Partner, Banks and Insurance Credit Research [10]

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So just in terms of -- I'm not sure I quite understood. The MDA will only apply at the group. So literally, whatever you have to have as a DSIB at the U.K. ring-fence doesn't get reflected up at the group?

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Robert Begbie, The Royal Bank of Scotland Group plc - Treasurer [11]

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That's right. I mean, it gets reflected in our total capital requirements for the group, but it doesn't impact the group MDA because it only applies at the ring-fence bank level.

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Corinne Beverley Cunningham, Autonomous Research LLP - Partner, Banks and Insurance Credit Research [12]

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And the impact in terms of the group [strength] equivalent, would that be roughly 75 bps?

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Robert Begbie, The Royal Bank of Scotland Group plc - Treasurer [13]

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I don't think we disclosed that. But yes, it's -- that seems a bit high. But, yes, we -- it's not a number we disclose. We don't double count that way. So we have to set off on the GSIB versus the DSIB buffer until [the fall].

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Operator [14]

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The next question today comes from the line of Lee Street from Citigroup.

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Lee Street, Citigroup Inc, Research Division - Head of IG CSS [15]

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I've got 3 for you. Firstly, just on IFRS 9 provision. I know there's a few questions on that this morning and you specifically mentioned the Appendix 1, given the sensitivities. Obviously, we're all trying to get our head around this, but would you be able to give us any indication, let's say, if the downside one scenario went from being a, let's say, 29.7% to like, let's say, a 40% likelihood, I guess, effectively, the base case. What that might actually mean for provisioning levels or more additional provisioning charge you might take? This question is not related to Brexit, it's more just related to a general weakening in the outlook.

Secondly, I know you've mentioned various headwinds in terms of a regulatory capital in the past in mortgage floors and the like. Can you just give us a quick recap on what we should be expecting in 2020 and what the impact on CET1 would be? And then finally, obviously, you're very well capitalized at the moment, 16% on a pro forma basis. Now you're obviously talking 14% on a look-forward basis. I suppose the question is just why is that 14% and how did you come up with that 14% number given your requirements [were this]? I mean why is 14% the correct number for you on a look-forward basis? That would be my three questions.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [16]

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Perfect. Thanks so much. I'll start with the first line, then I'll hand the balance over to Robert. I think probably the best place for you to have a look at in terms of the downside one becoming more of a base case is actually to have a look at the sensitivities which we had in the account for the year-end. I want to say it was something like Page 220-ish or something. So in terms of -- what they showed is actually in various kind of downside scenarios, the impact would be about a negative GBP 300 million.

Now it's interesting when you look at that, you think GBP 300 million, if you consider it with the size of the loan book that we have, that doesn't seem particularly impactful. But the reality is we have that as the first stage impact. And then later, as you saw businesses curate, you would see more come through as you got signs of those curation. But GBP 300 million would only be your immediate kind of impact. If you have a look at them and if you have any further questions, we'd be happy to kind of take them offline with you as well. That I think is a good place to start. Robert, do you want to --?

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Robert Begbie, The Royal Bank of Scotland Group plc - Treasurer [17]

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Yes. So on the RWA side, we didn't really talk about it today because we have plenty of stuff to talk about. But I mean, previously, we've guided to about GBP 10.5 billion as an initial indication, just on the mortgage floor piece and then 5% to 10%, covering the rest of the RWA impacts from Basel 3.5, 4, whatever you want to call it. I don't think we've got any further information that would change that guidance at this stage. I mean, I think clearly, it continues to evolve in terms of how the guidance is going to walk and how it gets implemented kind of locally in the U.K., but I think those are the -- these are the numbers certainly we've got plugged in the capital plan at the moment. And we haven't changed at all, certainly, in the second quarter or the first half of this year.

Your question around 14%, I mean it essentially -- where we'd get to 14% is looking at essentially a go-forward rolled-forward stress delta. So we will -- we have our stress delta that gets calculated and reported every year through the Bank of England, ACS stress test. We clearly look at that and how that evolves on a go-forward basis. And as you'll have seen, as we have dealt with legacy positions, issues, conduct, our stress delta has continued to come down. And so what we do is we look at the minimum level that we would not want to fall below on a 1 and 100-year stress, which is effectively the ACS stress. And then that solves for around a 4% stress delta with a 9% -- or over 4% stress delta.

So -- but I think, and Ross touched on it a little bit this morning. I think one of the things we're starting to walk through is that as we become normalized as a bank and we look at the stress resilience of our balance sheet, these are risk appetites we've got in place for a number of years as we've been restructuring and putting the bank back on a -- [from a] footing. So it's something we're kind of looking at at the moment. But, yes, I wouldn't expect us to change that target quickly. I think that target is our best estimate at the moment. That's what we will have to hold from 2021.

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Operator [18]

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(Operator Instructions)

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [19]

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Steve -- while Steve is actually doing that, I've actually got one on the line, which I'll take, which is from, I think, it's Jan Folkert (sic) [Folkert Jan] from Cairn Capital.

Does the transfer of the ownership of NatWest Markets and the need to be completed first before any potential LME exercise of their legacy instruments can take place? Do these legacy capital instruments have any longer-term purpose within the group? Rupert, that sounds like one for you.

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Rupert Mingay, The Royal Bank of Scotland Group plc - NatWest Markets Treasurer [20]

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Thanks very much, Katie. I think the answers to both of those is no effectively. As we've said in the IMS, we do expect actually the change of ownership would happen during the course of H2 and NWM NV would become a subsidiary of NWM Plc. And obviously, once the legacy instruments lose all that capital recognition, both within the legal entity structure and also the consolidated group, they just effectively have a debt characteristic with whatever coupon they've got.

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Robert Begbie, The Royal Bank of Scotland Group plc - Treasurer [21]

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And I think -- I mean, we have had a go at LME-ing some of these securities in the past with some success but certainly, not huge take-up. I think, historically, some of these securities have resided in retail-type investors' hands, so it's quite difficult to get them back even with a kind of attractive tender.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [22]

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Thank you. Steve, are there any more questions on the line?

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Operator [23]

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We do have one question on the phone from the line of Tom Jenkins from Jefferies.

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Tom Ian Jenkins, Jefferies LLC, Research Division - SVP and International Credit Analyst [24]

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I'll echo Mr. Smalley in saying thank you for holding the call at this time, particularly during the break in the cricket. So it's very convenient.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [25]

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We'll get you a report back on the score at the end.

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Tom Ian Jenkins, Jefferies LLC, Research Division - SVP and International Credit Analyst [26]

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Just sort of echoing FJ's question just on NatWest Markets, I noticed in the end of your N.V. report this morning that you issued EUR 250 million AT1 up to the group in H1. I don't know if you can give us the terms of that deal. I'm assuming not, I'm assuming that's sort of semi market terms, at least. But more to the point, I'm trying to get my head around why now? It seems relatively superfluous to be issuing an AT1 when you're running up 33-plus percent CET1 ratio. So sort of why now?

And again, just in relation to FJ's question, how that fits in with what you want the capital stack at N.V. to look like CET1, AT1 perhaps in the next year or so? And then just following up, going back to on a group level, and again, it's about legacies and, Robert, I know you mentioned legacy optimization calling a Tier 2 early in the year. Again, is there any chance you could give us a sort of 10,000 feet view of what you want? The sort of in terms of maybe ratio terms of RWAs of what you want AT1 Tier 2 to look like by the year-end or so? If you can help me on those, that would be great.

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Robert Begbie, The Royal Bank of Scotland Group plc - Treasurer [27]

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I think Rupert's going to pick up the N.V. question and then...

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Rupert Mingay, The Royal Bank of Scotland Group plc - NatWest Markets Treasurer [28]

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Sure. Thanks for the question. Yes. So N.V. issues at 81, as you say, just before the half year. It was issued internally through its holding company structure. I would expect that we'd align the ownership of that to PLC also in the second half and, therefore, effectively PLC would acquire that AT1 issuance. We've really just done it to make sure we sequence the various capital transactions we've got. There's no particular reason it was in place for the end of the half, given, as you say, the very high capital position that we have.

And the use of it really is that it's got regulatory value in terms of being an efficient way of supplementing CET1 for large exposures and other regulatory requirements. And obviously, the ratios will run on N.V. will be a function both of what the [DNB] requirements are and then how we calculate risk appetite pretty much on a similar way to what Robert mentioned.

So we have, I think, given guidance that we'll be running with about 15% CET1 and about 30% MREL. And I'd expect that 15% of non-CET1 MREL would predominantly be in the form of AT1 for an efficient amount. In other words, several percentage points, and then the balance a combination of sub-debt internally issued and debt that was probably issued also to us.

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Robert Begbie, The Royal Bank of Scotland Group plc - Treasurer [29]

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And just on the other part of that question, and given details of this transaction, I mean, we do, as far as possible, try and reflect the real market cost of any of the [downstreaming] in certain legal entities, which is partly around ensuring that we're not running on new risk in the holding -- include the holding company, which clearly, the Bank of England are keen to ensure as part of the resolution that we don't run [on June] as much as in the holding company. Did you want to say anything?

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [30]

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I was just going to add onto the N.V., the EUR 9 million euro of RWA, I think, within the N.V. business as well. Yes, target number of the -- sorry, for this target line business as well.

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Robert Begbie, The Royal Bank of Scotland Group plc - Treasurer [31]

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And then just to your second question on the group piece. I mean, we're consistently looking just to be as efficient as possible considering the Pillar 1 and 2A requirements and debt cost. So there's -- we think that we are fairly rigorous and transformed as we can be around how we're going to deal with some of these legacy securities. So it's a milestone, not a sprint. But we're kind of aware that we don't have a partner in terms of dealing with the stuff that won't turn going forward. I mean, we said we would look at it in the second half, and it's gotten [senile] looking at it at the moment. And just seeing whether there's a feasible transaction there for us to do. But it is in the context of overall optimization of our overall capital stack and the costs associated with that.

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Tom Ian Jenkins, Jefferies LLC, Research Division - SVP and International Credit Analyst [32]

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Okay because a question I often get is Brexit. Are you waiting for Brexit to happen before anything goes on in terms of optimizing the legacy stack? Is Brexit a consideration now? Is that just like a side show?

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Rupert Mingay, The Royal Bank of Scotland Group plc - NatWest Markets Treasurer [33]

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No, I mean, it's -- I mean, with the capital and liquidity ratios we've got, that those that are our defenses against Brexit, really, in terms of CET1 and liquidity. So within that, I mean, we've been active, we were active in retiring that Tier 2 security. So it's not really a factor. Brexit won't be a factor in terms of how we approach that.

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [34]

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Steve, do we have any other questions on the line?

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Operator [35]

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No further questions on the line. (Operator Instructions)

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Katie Murray, The Royal Bank of Scotland Group plc - CFO & Executive Director [36]

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We have one question that's just coming in. A bit more of an equity question, I guess, but happy to take it, John. So can -- [John Collins] from (inaudible) Ireland. Can I please ask you to elaborate a little further on your comments in relation to small signs of strain in the loan book? Does this point solely relate to the commercial loan book?

Thanks for the question, John. It really is that we do see some small signs. Actually, it's not necessarily within the commercial loan book. We've tightened a couple of our risk appetite on the personal lending side just to make sure that we're staying very much in line with where we want to be. You can see that in our provisioning, we've moved our provisioning case more to the downside than to the base, which is where we were more last time and where it was pretty even across the downside and the upside. We see a few, not very many, but some slow increase in numbers are going into the GRG space, which is a little bit of a spike there. I would be very cautious that you don't blow that out of proportion. It really is just some small signs, but they are signs that we felt it was important that we share with you.

And Steve, if there's no more questions, I'll just say thank you to you, and thanks, everyone, for joining the call. And obviously, if you have any other questions, please don't hesitate to contact Paul Pybus in our Debt IR team. He'll be very happy to deal with them for you. Thanks very much indeed for your time, and hope the cricket goes well in the afternoon.

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Robert Begbie, The Royal Bank of Scotland Group plc - Treasurer [37]

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Thank you.

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Operator [38]

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Thank you very much, ladies and gentlemen. You may now disconnect your lines.